Special Committee on Cooperatives Committee on July 24th, 2012

[The Chair, Conservative, Blake Richards]

I call the meeting to order.

Welcome, everybody. Today we have a couple of panels, and it looks like we have some very knowledgeable individuals here, from academia, from the industry itself, and from some umbrella groups as well. It should be an informative and interesting day.

We'll move right to our first panel. We have with us, from the Acadian Fishermen’s Co-operative Association, Mr. Jeff Malloy; and from Co-op Atlantic, the agriculture division, Mr. Bryan Inglis. We also have, by video conference, Mr. Tom Webb, a professor with the master of management program, cooperatives and credit unions, at Sobey School of Business, Saint Mary's University.

We'll start with you, Mr. Malloy, if you're ready. You have the floor for up to ten minutes to make your opening remarks.

Go ahead. The floor is yours.

[Jeff Malloy, Chief Executive Officer and General Manager, Acadian Fishermen’s Co-operative Association Ltd.]

Good morning, everyone. Thank you for the opportunity to appear before the committee.

I'm the CEO of the Acadian Fishermen’s Co-operative. The Acadian Fishermen’s Co-operative Association was formed in 1955 in Abrams Village, a small fishing community on the south shore of Prince Edward Island. This area of P.E.I. is well known for cooperative movements, and the creation of AFC followed the rural trend of farmers, fishers, and other groups banding together for economic reasons.

We owe our success to those pioneers who plowed the waves before us, namely Jean Gallant in Mont-Carmel and Phillippe Arsenault in Egmont Bay. Jean and Phillippe had two cooperatives, both in existence since 1944. They amalgamated in 1955 to form what we know today as the Acadian Fishermen’s Co-operative Association.

We've been successful for the past 57 years, with our business growing exponentially, and AFC is now one of the largest processors of seafood on Prince Edward Island.

Here are a few facts, just to give you an idea of what we do.

AFC is a seafood processing company specializing in lobster and crab, but it also produces several other species, such as scallops, herring, mackerel, etc.

AFC is 100% owned by 99 shareholder member fishermen. All member fishermen are from several ports in area 25. These fishermen have been hit very hard by the decline in the shore prices over the last several years. Figures from the Department of Fisheries and Oceans indicate that the average net income of fishermen from area 25 is 87% lower than that of north-side fishermen in area 24.

Sales for our co-op for 2011 were close to $24 million. Plant payroll for 2011 was $3 million, and an additional $1 million was paid out to fishermen's helpers, for a total of $4 million.

The total number of T4 slips issued to plant workers and fishermen helpers totalled over 400. We have had fishermen retire lately with over $40,000 in share capital that they've invested in our co-op. Fishermen investment stands at close to a million dollars.

Some of the challenges that not only we as a co-op but the seafood industry in general face right now.... The main things we've faced over the last three or four years, and many of you have probably heard it in the media...we've had a very difficult time, especially in the processing sector, with the many challenges that every exporter has, I guess, the obvious ones being the exchange rates and the world economy.

Another issue we face is with tariffs on processed products. That's something we've been trying to push for as much as possible. We'd really like to have more markets opened up to more products, especially in Europe, where some of the tariffs are as high as 17%, 18%, and 20%, especially on certain forms of processed lobster. That cuts off a lot of trade for us at a time when the landings are really high in the lobster industry in general. The more areas we can open up to get into, the better, obviously.

In terms of the landings in both Southwest Nova and the U.S., but especially this year in the U.S., they're having a very difficult time. Lobster is down to a low of around $2. I could probably buy lobsters today delivered into Prince Edward Island for $2.50 or $2.60 a pound. That's putting a real downward pressure on the industry in general. Obviously when the price goes down that low, the price for a finished product follows it. So it's pushed down the value of the product, obviously, and caught within Canadian waters as well.

In terms of some of the issues for our co-op, the owner-operator issue in the new fishery reform is certainly something my members are looking at. Obviously if bigger companies down the road can buy up lobster licences especially, it certainly goes against the whole co-op movement and what we stand for.

We also have other issues as far as having an uneven playing field. Certain provinces pay subsidies to their processors, and that allows those companies to sell product cheaper into the marketplace and it drives the price down for the finished product in general. We would like to see the provincial governments stay out of the subsidy business altogether.

As far as being a co-op ourselves, we would like to make it more beneficial for members to keep more money in the company, even though they are struggling themselves. We have fishermen who probably only stock $70,000 to $80,000 per year. Out of that comes their boat payments, their hired men, which is generally $750 a week during the season, their bait, their fuel expenses—all of that. So we have people who only clear in the area of $20,000 to $25,000 a year.

When it comes time to get every penny they can out of the product, from the co-op itself, unless they are very good members, it's very difficult to try to convince them to leave money in the co-op where it can grow the business. That's certainly a challenge, especially in our business.

We pay out huge amounts of money to buy the product for the payrolls, and it's in a short period of time—within a four- to six-month period—yet that product takes a whole year to sell. When you're putting out at any given time.... Our company, for instance, would probably borrow anywhere from $11 million to $12 million just to service the cost of being in business.

Certainly we've had tremendous help from our credit union system in general. We certainly would not be in business today if it wasn't for the support of our credit unions on P.E.I. They've done a tremendous job keeping us in business. To be perfectly honest with you, with the margins that we've made and the difficulties that the industry in general has had over the last three or four years, if we were dealing with a regular bank, our 57 years would probably have ended within the last few years.

It's very important that the credit union system stay strong for the co-ops because it's very difficult to get the interest with the low margins that we have in this industry. The interest from the commercial banks is very difficult to achieve.

As for co-ops in general, processing co-ops have had a very difficult time in the last few years. At one time there were probably eight to ten processing co-ops between P.E.I. and New Brunswick. There have been several of them closed over the last three to five years. So we are getting down there, as far as the number of co-ops that are still actually processing lobster.

I don't think that's a very good thing. We have a situation right now, for instance, with the two co-ops on Prince Edward Island. When the season opens this fall, on August 9, if it wasn't for the co-ops, there would be a lot of fishermen who would not have a home for their product. There are a lot of companies that are not even going to buy the product out of the season that starts August 9. We, ourselves, will take a fair amount of that product, along with—

[The Chair, Conservative, Blake Richards]

Mr. Malloy, sorry to interrupt, but 10 minutes has expired. I will give you 20 to 30 seconds to just wrap up with any final thoughts.

[Jeff Malloy]

Okay.

It's very important that the co-ops remain in existence.

I want to thank all of you very much for the opportunity to speak to you today and to give you a brief insight into the business of a fishermen's co-op.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We'll move now to Mr. Inglis from Co-op Atlantic.

[Bryan Inglis, Vice-President, Agriculture Division, Co-op Atlantic]

Thank you, Mr. Chairman.

Mr. Chairman, committee members, my name is Bryan Inglis, and I am vice-president of the agricultural division of Co-op Atlantic. I'm very pleased to be here today to represent my organization in front of the House of Commons Special Committee on Cooperatives.

This year, Co-op Atlantic celebrates its 85th year of operation. Our roots date back to 1927, a period of economic hardship when farmers needed a better and more profitable way to market their livestock. Federal and provincial agricultural fieldmen, as they were called, provided guidance and support from the beginning to lift farmers out of poverty by using the co-op model. Very early on, our founders' vision was one of an interprovincial cooperative organization that would meet the needs of both producers and consumers. Co-op Atlantic focused on understanding the needs of its members and acting proactively to find solutions.

Today Co-op Atlantic continues to partner with growers, producers, processors, and suppliers by developing reciprocal business arrangements whereby all functions of the supply chain remain local and strengthen our local economy.

Co-op Atlantic operates in five provinces in Atlantic Canada and is engaged in four business sectors: agriculture, food, energy, and social housing. Last year our sales were over $600 million, and as a combined system with retail and wholesale, we were over $2 billion. Our agricultural sector operates four feed mills, a poultry processing plant, and a commodity brokerage service for eastern and western Canadian farmers. We have 15 country farm stores, a wholesale farm supply business, and we're a member of Cooperative Research Farms, which is an international agricultural research group for feed.

The food sector, which we are very much involved in, provides procurement and marketing services to our retail member co-ops, as well as to small, independent retail business owners in Atlantic Canada. We're also a member of one of the largest food-buying groups: UGI.

Our energy sector operates 41 gas bars, 13 co-op energy stores, and bulk fuel storage and delivery operations.

Our fourth sector, which we don't talk enough about, is our housing sector. Co-op Atlantic manages 1,700 housing units, and these include housing cooperatives, non-profit housing, and housing for the elderly, the disadvantaged, and low-income families. We also provide management services for other housing groups in Atlantic Canada.

In the Atlantic Canada region, cooperative organizations number more than 750 in total, and together they provide 12,000 direct jobs. To give you a sense of the current realities of the Atlantic Canadian economy, which I'm sure you're aware of, I'd like to share the following.

Public spending reduction is a reality in all of our provinces. Federal government spending cuts will lead to employment reductions in Atlantic Canada, and this could represent as many as 2,300 jobs. The unemployment rate varies between 9.5% and 13%. More regulations will create new challenges for workers to qualify for EI.

Agriculture is facing international competition and deregulation, which will continue to put pressure on the economic viability of our farms. Young and educated workers are continually seeking opportunities outside our region. The aging population fosters the need for specialized health and housing services. Depopulation of rural communities in Atlantic Canada is taking place in favour of urban centres. Aging rural communities in Atlantic Canada are struggling to maintain essential services. Finally, urban centres are straining to meet ever-increasing infrastructure and social needs.

Due to these economic realities, we believe that cooperatives can play an important and strategic role. Given that cooperatives are enterprises that seek to meet member and community needs, which can be both economic and social, they're ideally positioned to meet the needs of both rural and urban communities. When conditions worsen, citizens look for opportunities to work together to come up with workable solutions.

Cooperatives can appropriately address the following emerging needs: employment, through the formation of worker co-ops where private businesses are pulling out or business succession and ownership transition is difficult; stability for the agricultural sector; continued provision of retail and banking services left behind by large corporations in an increasing number of communities; home care for the elderly who wish to remain in their own home as long as possible and not be a burden to the public health system; social housing solutions for the elderly, the low-income, the disadvantaged, and those with special needs; and solutions for energy generation to complement the services of major public utilities and to assist individuals in reducing their energy consumption.

Co-op Atlantic supports the Canadian Co-operative Association's recommendation to forge a new government-cooperative sector partnership. In our Atlantic region, the federal government agency responsible for creating opportunities for economic growth is ACOA. We recommend that ACOA be given an expanded role to support cooperatives.

Citizens prefer solutions that are locally owned and controlled. Co-ops are the ideal form of business enterprise for these initiatives, and as such, they deserve the same level of consideration, attention, advice, and support as conventional businesses.

We recommend that the federal government establish support for co-op business initiatives. The federal government could follow the Quebec example, where they have established a funded cooperative regional network called CDR, which provides expert advice to individuals forming and developing cooperative businesses. It also provides assistance to start-up and expanding cooperatives in order to access government and private funding.

Another example is in Newfoundland and Labrador. They provide training to economic development agency personnel in support of business initiatives emanating from cooperatives and equal status for access to funding programs. Economic development officers must come to view cooperatives as a legitimate form of business in today’s changing business environment.

Co-op Atlantic supports the Canadian Co-operative Association’s recommendations regarding access to federal funding programs. We recommend that the federal government provide the same access to capitalization programs for cooperatives as for private and shareholder cooperatives.

Some provinces have introduced legislation to provide incentives for citizens to invest in community development projects through the creation of community economic development investment funds, commonly known as CEDIFs, in some provinces. We recommend that the Canadian government look into this financial instrument to stimulate community investment.

While on the subject of capitalization, one cannot overlook the fact that during the recent market financial crisis, cooperative shares did not lose any value, since they are owned locally by the people who use their products and services and have a long-term commitment to ensuring the success of the business endeavours.

The federal government should encourage the development of a cooperative curriculum for schools and educational institutions in recognition of this valuable form of business and social enterprise.

I will conclude my presentation by reminding the committee that cooperatives have played a significant role in growing the economy of Atlantic Canada. Now is not the time to take your foot off the gas pedal. We must find ways to grow the cooperative sector to strengthen the Atlantic economy.

I would like to leave you with a reflection from Joseph Stiglitz, former chief economist for the World Bank and Nobel Prize recipient in economics. Mr. Stiglitz clearly stated that to achieve a more equitable distribution of wealth and to experience sustainable growth, nations need to find a balance between markets, government, and the social economy—that is to say, cooperatives.

I want to thank you for your attention.

I'll be very happy to answer any questions as we go along.

[The Chair, Conservative, Blake Richards]

Thank you, Mr. Inglis.

We'll now move to our witness who is joining us via video conference.

Dr. Tom Webb, I'll give you the floor for 10 minutes.

[J. Tom Webb, Adjunct Professor, Sobey School of Business, Master of Management in Co-operatives and Credit Unions, Saint Mary's University]

Good morning, and thank you for the opportunity to appear before the committee.

I'll give you just a very quick background. I have worked as a senior manager in a cooperative, I have sat on co-op and credit union boards, and I have worked as a consultant to cooperatives in Canada, the U.S., the U.K., Australia, and New Zealand. So I'm not just an academic. I have some mud on my boots.

Since 2000 I have been involved in creating a master of management in cooperatives and credit unions degree in the Sobey School of Business at Saint Mary's University. We created that special degree because managing a cooperative business is significantly different from managing an investor-owned company.

I would say that the key difference, first of all, is the business purpose. The purpose of a co-op is to meet member and community need. By contrast, the purpose of an investor-owned company is to provide maximum returns to the shareholders or investors. That, of course, creates a very different dynamic in terms of running the business, how it operates, and the kinds of pressures it feels and the kinds of pressures it responds to. We created the master of management program in co-ops and credit unions to apply the cooperative values and principles and business purpose to every aspect of cooperative business, and to assist cooperative managers in doing that.

At Saint Mary's we also created the Centre of Excellence in Accounting and Reporting for Co-operatives, which is funded by the Canadian Institute of Chartered Accountants. This fall we will be holding an international conference, in conjunction with the international cooperative summit, on cooperative economics. In other words, what would happen if we rethink economics, if we stop thinking of it just narrowly in terms of wealth creation and think of it instead as meeting human need? We might not turn to the economy and look at it simply in terms of its health being indicated by growth and the gross national product; rather, it's a healthy economy if it is providing its citizens with a decent income, with health care, with education, with the necessities of life. How well is an economy doing that as opposed to our simply having economic growth?

These are questions that are particularly germane for cooperatives, because unlike publicly traded investor-owned companies, cooperatives can do quite well, reasonably well, in an economy that is not growing, as we saw in 2008. Cooperatives did not produce any of the toxic paper that brought the global economy down. Cooperatives and credit unions, the financial institutions, continued to lend through the 2008-09 recession without having massive government subsidies and inflows of cash to encourage them to lend. They lent because their members needed loans, and they continued to grow. Cooperatives and credit unions around the world continued to grow in the face of the 2008 great recession. Again, they did that without the massive infusions of government funding that the global banking community needed.

So we have set up these programs, and we are looking at the global economy. Cooperatives have strong implications for public policy.

Often people will say that cooperatives need a level playing field, but too often what happens is that the playing field is defined as the playing field of investor-owned companies. In other words, let's give everybody the same playing field. What policy-makers need to ask themselves is what is needed for the encouragement of healthy cooperative development, which is a very different question.

If you think of the level playing field argument, you might think of it this way. Let's say I had a classroom of 100 students, and half of them were blind and half of them were deaf. If I said, “I'm going to treat you all equally; I'm going to write everything on the board and I'm not going to say another word”, it might be equal, but it sure as heck wouldn't be fair.

It is the same with cooperatives. They are a different kind of business. It's a different business model. It has some very positive public policy implications, such as its stability through the economic crisis. Cooperatives don't easily up and leave communities. Their failure rates are lower than private business failure rates, as studies in Quebec and across the country have shown.

So there are very strong public policy benefits from cooperatives. What we don't have is appropriate public policy support for cooperatives across the country. For example, if I were to look at my self-directed registered retirement savings plan, it is very difficult for me to put any of that in cooperatives and follow the rules of Revenue Canada. The government has lots to do in terms of coming up with a regulatory and policy framework for cooperatives that encourages them, and that is different but appropriate.

There are also regulatory issues concerning cooperatives. For example, in the recent couple of decades we've seen the need for harsher and harsher regulation around accounting standards. But cooperatives have not had the same problems with accounting. We haven't had the Enrons and the WorldComs and the Arthur Andersens. Cooperatives haven't had those kinds of business experiences. They haven't produced those kinds of business manipulations. Yet every time we tighten up, we ask cooperatives to jump through the same hoops as if they were Arthur Andersen.

So cooperatives need appropriate policy, appropriate legislation, and appropriate regulation. That will be a continuing challenge.

I'm open for any questions you might have, but I guess the thing I would end with is that the cooperative business model is the sleeping giant in the world. There are 100 million people working in cooperatives around the world. That is more than all the multinationals in the world put together. This is clearly a business model that works. It's clearly a business model, if we look at post-2008, that works very well in crises, that works very well in times of difficulty. In fact, one can argue that it even works better. This is an area where government needs to do some serious thinking in terms of how they create....

As a last point, we take our students to visit the co-ops in the Mondragón region of the Basque Country each year, and it's very interesting. When we were there in 2011, we asked officials what the gap was between the lowest paid and the highest paid. The gap was one to nine, as opposed to one to several hundred in the investor-owned companies in Spain.

We asked them how many people they have laid off as a result of the 2008 recession...in which Spain is not faring well. They have laid off none of their members. They haven't laid off anybody. As a result, in the three valleys where the co-ops are concentrated, the unemployment rate would be close to a structural unemployment rate of zero. In addition to that, in the Basque Country the unemployment rate as a result of the co-op presence is around 12%. In Spain it's 23%.

So in the midst of a staggering economy, the industrial cooperative base, with about 80,000 jobs in the Basque Country, is doing very well and is very strong. We could only wish that we had a similar cooperative industrial base in Atlantic Canada.

I'll leave it at that for now. If there are any questions, I'm sure all of us would be pleased.

I'm delighted to see you, Bryan and Jeff. It's very good to hear from you.

[The Chair, Conservative, Blake Richards]

Good. Thank you very much, Dr. Webb.

We'll move to our opening round of questions.

First up, from the NDP, is Madame LeBlanc.

You have the floor for the next five minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for agreeing to speak to us about the cooperative movement.

I will start with Mr. Webb.

You just told us how the right public policies could encourage cooperatives. Could you elaborate on that, especially the fact that if the federal government were to adopt such policies, it would grow and encourage the cooperative movement, which is a worthy business model.

[J. Tom Webb]

I think there are a number of ways. The one that is an obvious good starting point would be capital formation. Cooperatives need capital in order to survive and to do well. But in a cooperative business, the capital is not rewarded in the same way. It is not “capital take all”, in terms of the profits or the output of the business.

The profit from the business—if I can call it that—is distributed to the workers, to consumers, and in the community, and it's invested in the cooperative. What we lack is an appropriate investment strategy, and I think the federal government could play a very strong role in creating that, in fostering the creation of cooperative development funds, for example.

If I take a typical registered retirement savings plan, it's very difficult to invest in cooperatives within it because they don't often qualify. I think there's been a recent change in the regulations that makes it even more difficult, especially with regard to start-ups of new cooperatives, where you can't have eligibility for an investment—even through a CEDIF—if it is more than a certain percentage of the capital share of the cooperative. So starting a worker cooperative becomes more difficult under those arrangements.

Cooperative capital can be a very attractive investment for people. For me, for example, I would very much like to have all of my retirement savings plan available for investment in housing cooperatives, in day care cooperatives, in worker-owned cooperatives, as opposed to having it go out and end up funding an investment in the arms industry to build land mines to blow people up somewhere. If I had my druthers, I would rather have all of my investment capacity devoted to building society, and yet it's very hard to do that.

The returns, interestingly enough, if you go back.... Cooperatives aren't a natural place for people to look for high returns. You're not going to get a 20% return. You're not going to get 16% or 15%, but you can get a reasonable rate of return. When I look back over the last decade or decade and a half, one of the things that's clear is that if I had a modest rate of return from a cooperative investment fund, I would be better off than I would have been in the mutual funds market. I would have made more money in the long run.

Cooperatives have to compete against that lure of windfall profits. They have to compete against that. What government needs to do is to create the incentives for people to put their money in stable, sound, cooperative investment funds that will produce returns for the whole community, and not just for some investors far off somewhere. I think that's very doable.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you very much.

Saint Mary's University is one of the main organizers of the Imagine 2012 conference, part of the International Summit of Cooperatives that will be held in Quebec City.

What are your expectations for the international summit? How will cooperatives benefit, more specifically Canadian cooperatives?

[The Chair, Conservative, Blake Richards]

I will note that the time has expired. I've allowed you an extra 20 seconds, but I will allow our witness to answer very briefly.

[J. Tom Webb]

Have a number of members of Parliament come and attend the Imagine 2012 conference and have an opportunity to look at the economy from a different perspective, from the perspective of meeting human need. Certainly, we would be delighted to see them there.

What will the cooperatives get and what do cooperatives hope for? It's clear that our economy is failing in significant ways to meet human need. We have a looming energy crisis. We have a looming food crisis. We have ongoing financial turbulence in international markets. There's a whole series of problems, and I won't go into them all. But it's clear that the old neoclassical economics needs to be seriously rethought. It is not providing solutions to the problems that are facing us. We are in the midst of a jobless recovery after a series of recessions, including the great recession of 2008, so we clearly need to rethink what the economy is about and how we grow it in a stable, sensible way that meets human need. This is an enormous challenge.

[The Chair, Conservative, Blake Richards]

I'm very sorry, Dr. Webb. I'll give you five seconds just to wrap up very briefly. I've already allowed an extra two minutes.

Thank you.

[J. Tom Webb]

Sure. Let me just wrap up by saying that having another look at the economy for co-ops will give a different perspective on the enormous value of what it is they're doing to the global economy, and what it is they're doing to the Canadian economy and the Nova Scotian economy.

[The Chair, Conservative, Blake Richards]

Thank you very much.

Now we'll move to Ms. Gallant for five minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman. All my questions will be through you to the witnesses.

First of all, before I engage in questioning, there was a comment about the government's purchasing land mines and then blowing them all up. For the record, it's my understanding that Canada does not purchase or use land mines.

We'll get on with the questioning.

Mr. Malloy, you mentioned that your cooperative has been successful for 57 years. How do you measure that success?

[Jeff Malloy]

To begin with, we've been growing. We've been allowing the fishermen in our area to actually have a home to sell their product, which is sometimes a little more difficult than it would appear. We've created one of the best plans in terms of quality—we're BRC-approved. We're one of the most modern plants. So along with everything, we've gained a really good reputation in the marketplace.

Obviously, when the fishermen are happy.... We've been able to return during the good years, when we had an exchange rate of $1.56. They were great years, and we had really good profits. A lot of money was pumped back into the economy. We have a really high unemployment rate in the area, and the 175 or 180 seasonally based jobs are very important to the area.

I guess that's how we measure our success.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Now, you mentioned also that you borrowed $10 million to $11 million. How long does it take you to repay that? I assume it's to the credit unions.

[Jeff Malloy]

It's generally a combination. We have a broker that we work through. A little bit of the money is borrowed through them, but the majority of it is through the credit union. To be honest with you, we put that money out in a four- to five-month period and it takes us 12 months to pay it back. At any given time, as I said, we borrow a high of probably $11 million, and that gradually gets down by next May to $1 million or $2 million, and then we start over again.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

So it's more or less for operating costs?

[Jeff Malloy]

It's more for operating costs. We've done a lot of work to the plant and stuff, so we have whatever you want to call it, a mortgage or whatever, a long-term debt on the plant of around $3.5 million, and the remainder is working capital.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

How do the interest rates that you pay compare to those of the banks and their commercial lending, if you were able to obtain the capital through the bank?

[Jeff Malloy]

It's probably better. I know the broker we work through...we actually get a better rate than what we do through the broker and what the broker pays. It's generally a very good rate that we're able to achieve through the credit union.